Pat yourself on the back.

Government data show that in the face of the financial crisis, we have reduced our debt, cut our spending and, by one measure, boosted personal savings to the highest level this decade.

So now that you’re back on track, how are you going to make the most of your hard-won reserves? Will you rebuild your retirement accounts? The kids’ college funds? Buy a new home? Or should you put it away for a generic rainy day—or the day the rain comes through that old roof?

No matter how hard you try, there never seems to be enough savings to cover everything, even if you put away the 10% to 20% of your income that many financial advisers recommend. And let’s face it, many of us don’t save anywhere near that.

David Laibson, a Harvard University economist, estimates that about 10% of Americans save too much, while perhaps 30% of us have a healthy savings habit. And the rest of us? “When there’s money in the bank account, people go out and spend it,” he says.

Stash It Away
– Getting the most from your savings:
– Establish a cash stash for everyday needs.
– Hoard some for retirement and capture tax savings and an employer match.
– Maintain an account for future needs, such as home repairs, cars and occasional splurges.
– Start saving for college to lessen the pain later on.
– Consider a vacation account, so that you don’t have to turn to credit cards.

So let’s try another tack: Think of your various savings needs as something like your bedroom dresser. How well you fill that chest of drawers will determine how much financial flexibility you have and what kinds of choices you can make later in life.

Just as you have to have that all-important underwear drawer, you need an emergency-cash drawer. This drawer will give you daily comfort and keep you out of trouble, allowing you to pay the bills for a few months if you lose your job, get sick or face a financial emergency. Unless you have stocks or bonds that you are willing to liquidate, you need enough cash to cover a few months of crucial expenses, such as the rent or mortgage, bills and groceries.

Just as you need a sock drawer, you also need a retirement drawer to keep you warm in your later years. If your company still provides a pension, that drawer may be filled for you. But most of us need to contribute to it, and the tax incentives and potential employer match of a 401(k) or a similar account make that an attractive place to put your savings.

You might also consider a vacation drawer, for funding your fun. For some of us, it’s as crucial as a drawer for T-shirts and tops. “That’s usually one of the top four or five biggest expenses for most families,” after housing, cars and food, says Don Linzer, chief executive of Schneider Downs Wealth Management Advisors in Pittsburgh. But most people don’t budget for vacations, running the risk of being caught short when the credit-card bills arrive.

To help you prioritize, here’s a bedroom-dresser model for filling your savings drawers at various stages of your financial life:

When you’re starting out. Saving money from a first-job salary is tough, but once you get in the habit, it will pay huge dividends. By transferring a little money to your savings drawer with every check, you will accumulate an emergency fund off the bat. If your debt drawer has lots of high-cost credit cards, you’ll want to clean that out as well.

When those two drawers are in good shape, you can start filling that retirement drawer, which offers a tax break for your 401(k) contributions, a potential match from your employer plus the opportunity to benefit from many years of growth.

Your goal should be to contribute at least enough to capture your employer match, which is like adding to your financial wardrobe free. Ultimately, you will want to contribute about 10% of your pay toward retirement; if you contribute 6%, and your employer throws in a 3% match, you’re nearly there.

Your next priority is to start building your other savings and reserves, the equivalent of your jeans drawer. This is the drawer that gives you options and helps you look good—money that allows you to buy a car and make a down payment on a house, or that gives you the flexibility to do things you really want to do.

.When you have a family. As if diapers and day care don’t strain your budget enough, you will want to starting thinking about a college-savings drawer when your kids are still young and you have a lot of years to save. Consider this the equivalent of your workout-clothing drawer, for savings that will help your financial health later on.

Again, you should be tending to your cash fund and retirement savings first. But you’ll then want to consider at least a small contribution to a 529 plan, which grows tax-free. You can increase your contributions as you get a better sense of what kind of student your child is.

College is expensive, but try not to get overwhelmed: It doesn’t have to be fully funded before your child leaves high school. If you’re also paying down a mortgage, that’s a form of savings too.

Colleen Schon, senior vice president of the Barrett Group of Raymond James & Associates in Auburn Hills, Mich., calculated that hypothetical parents in their mid-30s, with two kids and $150,000 in income, should put about a quarter of their savings in their retirement funds, about a quarter in 529 accounts and the rest in other savings, to cover home repairs, vacations and other needs.

That isn’t always what happens, though. In fact, families with incomes between $100,000 and $250,000 “are the worst at savings,” Ms. Schon notes, because they have high expectations for their houses, cars and their kids’ experiences. “Keeping them focused is really difficult,” she says.

When the kids leave home. With the college drawer cleaned out, people in their 50s and 60s should focus on building up their retirement savings, aiming to contribute the maximum allowed, up to $16,500 annually—plus $5,500 in catch-up contributions each year—plus whatever they can save outside those accounts.

This “is one of the most challenging stages,” says financial adviser Trudy Haussmann, president of Haussmann Financial Inc. in Newport Beach, Calif., “because children are much slower these days to leave the payroll.” In addition, your own parents may need support.

Empty-nesters may also want to consider replacing that college drawer with one for long-term care, which covers home health aides or nursing-home care. Think of it as your woolly-sweater drawer for keeping you warm on the coldest days. If a family’s assets are more than, say, $300,000 and less than $1 million to $2 million, long-term care insurance, while costly, may make sense.

When you retire. With your retirement drawers hopefully bulging, now it’s time to rearrange your dresser altogether. Funds needed for the next five years or so should be in cash or short-term investments so they won’t be subject to stock-market fluctuations. It may also make sense to keep funding that vacation drawer, if traveling during retirement is a priority.

Funds you won’t need for five to 10 years should be treated as medium-term savings, while funds that you won’t need for 20 years will be your long-term savings. And if you’re in a position to do so, you might want to consider restocking that college drawer, to fund 529 accounts for the grandchildren.

—Email: familymoney@wsj.com

Source: WSJ